Landlord limited company formations

In 2024, landlord limited company formations reached a new high. According to new research by estate agents Hamptons, landlords will set up over 60,000 buy-to-let companies during the year. This is an increase of 20% on 2023.

In recent years, there has been a marked trend of landlords switching to limited companies. In 2008, there were fewer than 5,000 new buy-to-let limited company formations. By 2017 this number had reached 24,190: less than half the number registered in 2024.

Why are landlord limited company formations so popular?

The main reason landlords are setting up limited companies in record numbers is simple: it’s to save tax.

Since 2016, the government has introduced a series of measures that have put the squeeze on landlords. Before then, landlords could offset ‘finance costs’ against tax, including mortgage interest, interest on overdrafts and certain loans, plus fees and costs incurred for obtaining or repaying mortgages and loans.

This generous system was phased out incrementally between 2016 and 2020. Today landlords can claim tax credits instead. However, they can now only claim a tax credit of 20% on mortgage interest. Worse, this credit only refunds tax at the basic rate – meaning it’s an even worse deal for higher rate taxpayers.

There have also been other measures that have penalised landlords. From 2016, anyone purchasing a buy-to-let property has been slapped with a 3% Stamp Duty Land Tax (SDLT) surcharge. From 30th October 2024 this surcharge has been increased to 5%. In addition, other changes mean that landlords now have to cover almost all of the fees involved in setting up a new tenancy.

Given this backdrop, it’s little wonder than many landlords have been looking for more tax-efficient ways of managing their buy-to-let portfolios.

Why people set up landlord limited companies

If you manage your portfolio via a limited company, and your profits are below £50,000 you pay Corporation Tax at the small profits rate of 19%. Otherwise your company pays up to 25% (from April 2023). This compares to the three Income Tax bands of 20%, 40% and 45%. Once you have set up your company, you can then pay yourself a mix of salary and dividends. Normally you’ll take salary up to your Income Tax personal allowance, then top up with dividends. Dividends are taxed at 8.75%, 33.75% and 39.35% depending on your tax band.

Not only can a limited company potentially allow you to reduce tax on your personal income, but it also lets you deduct mortgage interest from your profits – which, for many people, is a major tax break.

Should I set up a limited company?

Seeing as so many landlords are setting up limited companies, surely it’s a no-brainer to do the same?

Not so fast! Setting up a limited company without understanding the full implications can leave you seriously out of pocket.

For example, if you transfer properties you already own to your new limited company, then it counts as a sale for tax purposes. This means you get hit with large SDLT and Capital Gains Tax bills on your own properties! In addition, switching to a limited company can have mortgage implications. Company mortgages tend to cost more than the loans offered to individuals.

We have written a special guide for Landlords which explains this in more detail and this guide can be found here.

Help! I need advice on my portfolio

If you are a landlord and you need help on the best way to structure your portfolio, we can help. Our team of buy-to-let experts can advise you on the most tax-efficient way to manage your buy-to-let properties.

The service is only offered to THP clients whose Self-Assessment Tax Returns we already handle. This is important as we need a detailed financial insight in order to give the best advice.

So, if you’re a landlord and you’re one of our clients, give us a ring. If you’re not currently a THP client, maybe it’s time you should switch to the Accountants for Landlords!